Looking abroad: Malaysian construction firms seek contracts overseas

Analysis

As hot as Malaysia’s local construction market may be over the next several years, it cannot obscure the fact that the country has fewer than 30m people and a modest GDP of $278bn. At the same time, the total value of work done abroad is still dwarfed by the local market, and just a few companies are big enough to do major international jobs. Construction firms have the opportunity to use international work as a capacity-builder, enabling them to do more complex projects in the future, but getting that work will require companies to be proactive and penetrate new markets.

A DROP IN VOLUME: Malaysia’s construction sector is seeing a retrenchment away from overseas markets after a pre-crisis period in which companies were awash in contracts. According to Construction Industry Development Board (CIDB) statistics, the volume of international contracts won by Malaysian companies fell from around RM19bn ($6.1bn) in 2006-07 to under RM4bn ($1.3bn) in 2010 and 2011. Most of this decline came from the Middle East, which had been embarking on a major spending spree prior to the crisis and, later, the Arab Spring. MENA countries accounted for RM13.7bn ($4.4bn) in contracts in 2006 but only RM2bn ($645.2m) in 2010, while the 2011 (preliminary) total was just RM59m ($19m). This drop is out of proportion to the change in construction spending by MENA countries, suggesting that Malaysian companies are either losing interest in the market or are being outcompeted.

The largest Malaysian firms are making a splash in foreign markets. At the top is Gamuda, which is the only Malaysian firm to mark the Engineering News Record’s Top 225 list of global contractors, with RM5.3bn ($1.7bn) in completed projects, although it has just a single ongoing job. This is a joint venture with WCT and Chinese firm Sinohydro to develop the RM2.6bn ($838.8m) New Doha International Airport, for which Gamuda has an RM1.5bn ($483.9m) contract for roads, tunnels and runways. WCT has recorded RM4.4bn ($1.4bn) in contracts since 2002, with RM1.4bn ($451.6m) in the pipeline. The most active current contractor is IJM Construction, which has RM3.5bn ($1.1bn) in ongoing projects and RM4.5bn ($1.5bn) in previous work. These are limited to property development and road works in India and several pieces of a luxury hotel project in the UAE. In total, 115 companies have done work in 49 countries since the CIDB’s records began in the 2000s.

PROSPECTS: Master Builders Association Malaysia and other sector officials have begun encouraging contractors to look to Asia for growth, citing the large domestic populations and their need for housing and infrastructure. The Asian Development Bank (ADB) has estimated that ASEAN countries will need to spend $60bn annually on infrastructure for the next decade to maintain their intended levels of economic growth.

Much of this funding will be private, but given the large-scale, long-term nature of these projects, some public support is expected. The ASEAN Infrastructure fund, launched in 2012, aims to be one piece of the public financing puzzle. With initial equity of $485m, the fund aims to finance six projects per year across the region, anticipating total lending of up to $13bn through 2020. Malaysia will be a central player in the fund, as it contributed the most money – $150m – of any country, and it hosts the limited-liability company which the ADB created to implement the scheme. This investment vehicle joins the China-ASEAN Investment Cooperation Fund (CAF), a Chinese endeavour which raised $1bn in initial funds in 2010. CAF has invested $400m in the region, and plans to deploy $500m in 2012.

Kwan Foh-Kwai, president of the Master Builders Association Malaysia, told OBG the economic opening of Myanmar presented a valuable opportunity for Malaysia to expand. The country is so underdeveloped that there will be plenty of opportunities for interested firms.

Overseas work could even prove somewhat of a remedy to the low capital intensity of Malaysia’s construction sector. By working in locations with lower duties on machinery imports, and adding to their cash flow, firms can raise capital for investments in mechanisation and other productivity enhancements.